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Using Fibonacci to Make Great Trades
12/18/2012 11:00 am EST
Trader Anne-Marie Baiynd explains why you shouldn't trade on the pullback, but instead trade on the bounce of the pullback.
My guest today is Anne Marie Baiynd. We’re talking about Fibonacci and how close does a candle have to get to an actual line to be a valid signal, so Anne Marie, we would all love to see the candle touch that 618 line and immediately reverse right after it. It rarely happens that way. So, can a price come through the line, can it come close to the line? What do you like to see?
Well, I’d like to go back first to say why the line works and see for us, as general traders, when we draw a Fibonacci line, we are approximating what algorithms are actually doing because it is big volume that actually moves things off of levels. If our Fibonacci has the same measurement as big money has, then it is going to pop right up off the level.
Sometimes, if we have been waiting and waiting and waiting and waiting on the level, enthusiastic buyers will step in front of the level and take it up. Those are usually the most unreliable ones because they do like to trace to where it is that they are supposed to. Something else that is happening in the market is that market makers and other folks that like to play this game, if everyone is looking at the Fib, what they will do is they will blow through it. They will sell 100 below it and what they will do is suck in new unsuspecting shorts and blow out weak longs so they are hitting stops all the way there, getting the price they want, and then it moves to where they are going to go. That is a pretty big game.
Here is the thing. You never want to trade on that pullback. You want to trade on the bounce of the pullback. If it is a relevant level, it will retrace the event and say, hey, did I shut that door? It has a tendency to do that so that is like catching a falling knife. If you go, hey, listen, I am taking it to the 61.8, that is great, maybe you are right, maybe you are wrong, maybe your stop is too tight and you were right and then it ends up losing money, why not wait for the bounce? The best thing that traders can do is be the first adopters, not the first leaders, right. We want to adopt what is happening in the market. Let someone else take the risk at that 61.8. If it bounces up off the level a little bit, you know that other interested players are coming in, because remember, great trades are not lonely trades.
So you want to almost wait for the reaction to the reaction.
If it for some reason doesn’t come back, if it doesn’t react to that first reaction, there would always be another trade.
Yes, and, interestingly enough, it will try to come back and retest the area that it just came to. If it comes back in and it doesn’t quite hit it, that means buyers have gotten excited and are stepping in front of the level and for us, as traders, that is great because they are providing the cushion and preventing a fall for us.
So maybe just a little more patience.
That is exactly right.
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